Tuesday, December 09, 2008

Lodging Investment and the Hotel Bust

by Bill McBride on 12/09/2008 07:10:00 PM

Start with a stunning graph ...

Lodging Investment as Percent of GDP Click on graph for larger image in new window.

This graph shows investment in lodging (based on data from the BEA) as a percent of GDP. The recent boom in lodging investment has been stunning.

Note: prior to 1997, the BEA included Lodging in a category with a few other buildings. This earlier data was normalized using 1997 data, and is an approximation.

And a press release today from PKF Hospitality Research: PKF Forecasts 7.8 Percent RevPAR Decline in 2009

U.S. hotels have entered the initial stages of one of the deepest and longest recessions in the history of the domestic lodging industry according to a new report issued today by PKF Hospitality Research (PKF-HR). The 7.8 percent drop in RevPAR that the hospitality research firm is now forecasting for 2009 will be the fifth largest annual decline in this important measure since 1930.
Compare this to the recent forecast from PricewaterhouseCoopers: PricewaterhouseCoopers Forecasts a Substantial Reduction in Hotel RevPAR in 2009
According to the PwC forecast, 2008 RevPAR will decrease by 0.8 percent, primarily due to a 3.7 percent decrease in occupancy, the highest annual decrease in occupancy since 2001. In 2009, demand is forecast to decrease by 2.0 percent, which, when coupled with a 1.6 percent increase in supply, is expected to further reduce occupancy to 58.6 percent, the lowest since 1971.
"The deteriorating outlook for the economy is impacting travel habits and spending, and hotels are expected to experience reduced occupancy levels, and to a lesser degree, some room rate erosion through 2009," said Scott Berman, principal and U.S. Leader of PricewaterhouseCoopers' Hospitality and Leisure practice.
Mix in tight lending standards, and I expect a significant decline in lodging investment as current projects are completed.

Note: notice the scale. Whereas residential peaked at over 6.3% of GDP in 2005, investment in lodging is peaking now at just a fraction of residential investment - around 0.34% of GDP. Size matters when evaluating the economic impact of a bust on the economy.